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Errata: An error was found in Issue Brief No. 97, Initial Findings
from HSCs 2005 Site Visits: Stage Set for Growing Health Care Cost and
Access Problems, after the reports release on Aug. 24, 2005. The error
related to the status of a Premera Blue Cross tiered-network product. All
online documents were corrected to reflect the change on Sept. 23, 2005.

Many developments in local health care markets appear to be setting the stage
for additional health care cost increases and access-to-care problems, according
to initial findings from the Center for Studying Health System Changes (HSC)
2005 site visits to 12 nationally representative communities. Hospitals and
physicians are competing more broadly and intensely for profitable specialty
services, making costly investments to expand capacity and offer the latest
medical technologies, especially in more affluent areas with wellinsured populations.
Employers and health plans have launched few initiatives to control rising costs
beyond increasing patient cost sharing. As rapidly rising costs continue to
push private health insurance out of reach for more people, state and local
governments are struggling to meet the needs of low-income people and an increasing
number of uninsured people.

Building Boom Continues

he most striking development in the 12 health care markets
tracked by HSC is the ongoing building boom and rapid expansion of both inpatient
and outpatient capacity (see Data Source). Many hospitals
are expanding medical-surgical capacity, especially in profitable specialties
and in affluent suburban areas with growing, well-insured populations. For example,
in Indianapolis, the areas four major private hospital systems plan more than
$1 billion in combined renovations and new construction primarily in the communitys
growing suburbs.

Despite a history of perceived overcapacity in the health care
system, a variety of factors are driving expansions today. During the peak of
tightly managed care in the mid-1990s, many hospitals closed beds and shelved
modernization projects in the face of declining service utilization, pricing
pressures and the high cost of borrowing. As health plans relaxed administrative
controls on care use starting in 1999, utilization rates, especially for inpatient
care, rebounded, straining capacity.

Today, overflowing emergency departments
are a visible sign of tight hospital capacity and are a key area for investment.
Expansions also have been driven by a desire to keep pace with demographic trendsresponding
both to the changing needs of an aging population and areas of rapid population
growth. Low interest rates have contributed to the ongoing building boom, and
many hospitals continue to use their considerable bargaining clout to obtain
higher payment rates from health plans, giving hospitals greater financial stability
and ability to shoulder debt.

Intense Service-Line Competition

ompetitive positioning also is a major factor
underlying expansions of inpatient and
outpatient capacity. Competition among
local hospitalsand between hospitals and
physicianshas focused on key, profitable
service lines, including cardiac, orthopedic
and cancer care.

While growth of stand-alone physicianowned
specialty hospitals stalled as a result
of the moratorium imposed under the
2003 Medicare Modernization Act, diagnostic
and surgical services increasingly
are being provided in physician offices
and physician-owned ambulatory centers.
Facing stagnant growth in professional fees
and pressure from growing malpractice
premiums and other practice expenses,
physicians increasingly have sought facility
fees as an important new revenue source.
Marked disparities in the relative profitability
of certain services under both Medicare
and private plan reimbursement policies
appear to be a major force driving competition
for these key services.1

For instance, one multispecialty medical
group in the Phoenix area with a large
retiree population added a positron emission
tomography (PET) scanner to its practice because of the potential to increase
revenue from Medicare. In Miami, singlespecialty
medical groups are being formed
for the first time, with observers indicating
that achieving the scale needed to offer
profitable ancillary services within the
practice is the prime motivation for these
arrangementseven more important than
gaining leverage with health plans. These
financial incentives, coupled with continued
technological advances that allow more
procedures and diagnostic services to be
performed profitably on a smaller scale,
have led to a shift of a growing number of
services from hospitals to physician offices
and physician-owned facilities.

In many communities, hospitals view
the growth of physician-owned facilities as
the most serious competitive threat they
face. For example, two Miami hospital
systems reported dramatic declines in the
volume of endoscopy procedures as a result
of staff gastroenterologists opening competing
endoscopy centers. Many hospitals
across the 12 communities have responded
by forming joint ventures with physicians
to retain at least some of this revenue; in
other cases, hospitals have responded by
opening facilities separate from their main
campus to directly compete with physicians
for these lucrative services.

Competitive Fallout

apacity expansions and intensified service-
line competition have a number of
consequences for local health care markets.
Perhaps the most obvious effect is on
costs. Whether meeting or creating new
demand, these capacity expansions are
destined to lead to higher rates of care use.
Some of that additional use no doubt will
provide increased access to beneficial care.
However, there are concerns that physicians
face strong financial incentives to recommend
more services when they have an
ownership interest in a facility, potentially
leading to unnecessary care or care that
adds little value or benefit to patients. The
bricks-and-mortar expansions and acquisition
of new technology also will increase
demand for nurses and technicians already
in short supply and whose compensation is
being bid up.

In theory, some of these cost impacts
could be offset by renewed health plan
leverage to negotiate discounts with hospitals
and physicians, stemming from
increased numbers of competitors to
deliver these services or the re-emergence
of excess capacity. Some health plan executives
have suggested that this may come
to pass down the road, but no signs had
emerged during HSCs recent visits to the
12 communities.

The intense competition for profitable
services also potentially can influence
the availability of health care services and
patients access to care. While many hospitals
are expanding emergency department
capacity, increasingly hospitals, especially
those serving many uninsured patients,
are struggling to get physician specialists
to provide on-call coverage for emergency
department evaluations and trauma care. In
some cases, hospitals are paying physicians
to provide on-call coveragehistorically
part of physicians obligation in return for
hospital privileges. As specialists provide
more services in their practices or in facilities
they have a financial interest in, they
become less dependent on having privileges
at hospitals, potentially diminishing access
to specialty care for some patients.

Indeed, the movement of profitable
services out of hospitals and into physician
practices and physician-owned facilities
poses a threat to some hospitals ability to
subsidize care for less profitable services
and for low-income patients. And, as hospitals
expand lucrative services, some are
cutting back on less profitable ones such
as inpatient psychiatric care, placing more
pressure on safety net hospitals to provide
this care.

Moreover, the build up of specialty
services is occurring at the same time that
many inner-city hospitals caring for large
numbers of uninsured patients continue to
struggle financially. For example, in northern
New Jersey, suburban hospitals have
aggressively expanded capacity, particularly
in key niche service lines, but hospitals in
declining urban areasespecially those
without direct state support or alliances
with the suburban systemshave struggled
to upgrade existing facilities. Unable to
access the capital needed to modernize or replace out-dated facilities, many hospitals
find themselves in a vicious cycle as they
become less attractive to privately insured
patients.

Few Cost-Control Strategies

espite continued double-digit annual health insurance premium
increases2 and growing anxiety about how to pay for health benefits,
plans and employers have had few initiatives other than increased patient cost
sharing to control cost growth. Since traditional managed care tools, such as
utilization controls and selective provider contracting, have fallen into disfavor
as a result of the managed care backlash, health plans largely have focused
on new product designs aimed at engaging consumers to make more cost-conscious
decisions about service use and choice of providers.

Plans across the 12 markets quickly developed consumer-driven productshigh-deductible
coverage linked to spending accounts, including health savings accounts (HSAs)
and health reimbursement accounts (HRAs), but enrollment to date is limited.
Notably, employers offering such products have generally not dropped their current
health maintenance organization (HMO) or preferred provider organization (PPO)
products. Few of the consumerdriven products available today offer information
to help patients differentiate effectively between types of services or choose
providers that deliver the best combination of price and quality.

Some plans have experimented with new approaches to selective contracting, with tiered-network or narrow-network designs, but few of these products have taken off, largely because of difficulty in differentiating providers based on cost and quality. Now, health plans are focusing on high-performance networks, a relatively new narrow-network product that selects individual physician practices for preferred status on a specialty-by-specialty basis according to measures of quality and efficiency of care. For example, in Seattle, Aetnas high-performance network has gained much higher enrollment than expected. However, observers noted that the plan was unable to exclude some physicians in large group practices regardless of their quality and efficiency scores because the groups require the plan to contract with all or none of their physicians.

While new product designs have not yet panned out as hoped, many plans are
developing pay-for-performance (P4P) initiatives to reward providers that meet
certain cost, quality and patient-satisfaction goals. In a small number of the
12 markets, providers have received initial payments under these programs on
the basis of measured improvements in care delivery. But in most markets, plans
appear to be moving slowly in the development and rollout of P4P to allow time
to wrestle with the complexity of measuring performance and to win provider
acceptance. An inherent limitation is that most plans represent only a small
fraction of a medical groups patients, giving plans limited leverage to move
P4P forward. A notable exception is seen in Orange County, Calif., where the
Integrated Healthcare Association has facilitated use of the same performance
measures by a number of health plans to ease administrative burdens on participating
providers.

In the absence of significant innovation to control health care spending
growth, plans and employers have continued to focus primarily on shifting costs
to consumers as the key response to rising premiums. One result of rising premiums
has been more people becoming uninsured. Some small employers reportedly are
dropping health benefits, while in other cases, increased employee premium contributions
have led to lower rates of take up of health insurance.

Growing Safety Net Distress

hile health care costs continue to rise and
health insurance becomes less affordable,
the public sector has fewer resources to
respond to growing needs for coverage or
subsidized care. The combination of ongoing
state budget constraints, unwillingness
to raise taxes and federal budget pressures
has left state and local governments hard
pressed to keep up with growing needs for
coverage and care.

Although Medicaid and the State
Childrens Health Insurance Program
(SCHIP) account for a substantial and
growing portion of state budgets, remarkably
these programs have been spared
major cuts to date in most states. Yet states
have raised barriers to enrollment through
reintroduction of six-month recertification
requirements, other changes in the eligibility
process and a reduction in resources
devoted to outreach. Virtually all planned
expansions have stalled, and many states
now are considering more far-reaching
changes, such as reducing covered services
and eligibility levelsprimarily for adultslowering provider payment rates, introducing
patient cost sharing and requiring aged
and disabled people to enroll in managed
care.

Meanwhile, reports from providers
caring for uninsured patients suggest that
there already has been a noticeable uptick
in demand for services from people without
coverage. While many communities have
expanded safety net primary care capacity
over the past few years, thanks in part
to federal expansion grants, providers are
struggling to keep up with growing demand
for these services. Many community health
centers and safety net hospitals report that
funding support has not kept pace with the
increasing numbers of uninsured patients
they treat.

For example, the county hospital system
in Miami is facing significant deficits stemming
in part from charity care needs growing
faster than the systems funding from a
dedicated half-penny sales tax.

At the same time, access to specialty
care for both Medicaid and uninsured
patients appears to be declining. As many
private physicians feel squeezed by low
reimbursements for professional services,
they reportedly are more reluctant to treat
low-income patients, resulting in greater
demands on safety net providers. In several
communities, waiting times for specialty
clinic appointments at safety net hospitals
have increased, with average waits of six
months reportedly not uncommon. In
communities with a substantial number of
undocumented immigrants who cannot
qualify for publicly sponsored programs,
these pressures are even more intense.

Quality Improvement and IT Investment Gain Traction

espite the generally bleak picture emerging
from local health care markets, some
developments promise positive change for
the future. First, increased attention has
been paid to hospital quality improvement
over the past two years. Some hospitals,
especially those that lagged in adopting
quality improvement initiatives, pointed
to Medicares linking a portion of the hospital
inpatient payment update to public
reporting of data on the quality of care as
an important catalyst. This initiative has
helped focus hospital quality improvement
efforts. Indeed, many hospitals expect
payer and patient demand for demonstrated
quality to increase and, therefore, view
these activities as important investments to
be able to compete in the future.

At the same time, information technology
(IT) investment has increased, but the
scope is more limited than some policy
makers and industry proponents would
suggest. Hospitals and a handful of large
physician groups are at the forefront of
significant IT investment. One focus is on
improving communication and documentation
of patient care within individual
organizations and between hospitals and
their medical staffs. Examples of IT systems
being developed to share information
on a community-wide basis existin
Indianapolis, for instancebut are rare. In
addition, there appears to be little development
of IT aimed at assisting consumer
decision-making about use of services or
selection of providers. Improved efficiency
and quality will likely result from the IT
investments that are being made but given
the scope of these activities, they may well
be slower and more modest than touted.

In addition, some observers note growing
disparities in hospitals capacity to
invest in the most resource-intensive information
technology and quality improvement
activities, which threaten to widen
the performance gap between institutions
catering to the affluent and those primarily
serving the poor. This situation may, in
fact, worsen under public and private payer
initiatives to link reimbursement to clinical
performance. For example, hospitals could
be penalized with lower payments if they
lack resources to invest in adequate staff
to coordinate quality improvement activities
or health IT to track performance and
allow feedback to clinical staff.

Implications

verall, the promise of quality improvement
initiatives and IT investments pales
in comparison to the scope of the cost and
access problems confronting the health care
system today.

If current trends continue unabated,
communities are likely to face growing
numbers of uninsured people and increasing
disparities in access to care by income
and geographic location. Looking forward,
all health care stakeholders, policy makers
and the public will have to more explicitly
address the problems underlying these
trends and either revisit solutions that have
been discarded, get serious about developing
new ones, or accept the implications of
continuing the status quo.

Data Source

Every two years, HSC conducts site visits in 12 nationally representative
communities as part of the Community Tracking Study to interview health care
leaders about the local health care market and how it has changed. The communities
are Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little
Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle;
and Syracuse, N.Y. Approximately 1,000 total interviews are conducted in the
12 communities with representatives of local health plans, hospitals, physician
organizations, major employers, benefit consultants, insurance brokers, community
health centers, consumer advocates and state and local policy makers.

HSC recently completed its fifth round of site visits; field work began
in January 2005 and was completed in June 2005. This Issue Brief is based on
initial findings from the 12 communities. Shortly after each site visit, HSC
issues a Community Report describing the major changes in each community since
the previous site visit. As each Community Report is released it is available
on the HSC Web site at www.hschange.org.